Knology Wants to Ride Sale Wave

3/05/2012 12:01 AM Eastern

By: By Mike Farrell

Knology is the latest cable company to testthe deal waters, hiring a pair of investment bankers to exploreits strategic alternatives, including a possible sale ofthe West Point, Ga., triple-play overbuilder.

Sources confirmed a report in The Wall Street Journallast week that said Knology was seeking a buyer. Accordingto sources in the investment community, Knology, encouragedby a robust debt market and a handful of recentcable deals, hired investment bankers Credit Suisse andBank of America Merrill Lynch to shop the company toprospective purchasers.

News of a possible Knology sale sent its stock soaring.On Feb. 28, Knology’s share price hit a new 52-week high of$19.34 (up 22%, or $3.53) before settling down later in theday to close at $17.47, up 10.5% ($1.66). The new 52-weekapex shattered the stock’s old high-water mark of $16.23.

A more measured upward slope continued on Feb. 29, a2.1% (36 cents) gain to $17.83 per share.

TARGET: $1.5 BILLION

Knology is seeking as much as $1.5 billion for its assets,representing about 8 times its 2011 cash flow of $187.1 million,sources in the financial community told MultichannelNews.

That would be in line with some recent MSO deals: InsightCommunications and Bresnan Communicationswere sold (to Time Warner Cable and Cablevision Systems,respectively) for prices that valued the companies in cashflow multiples of 8.3 to 8.5.

Knology, though, is not expected to command that higha price. Recent deals involving overbuilders are seen by financial experts as more comparable.

Take RCN’s $1.2 billion going-private deal in 2010, the$270 million recapitalization of Grande Communicationsin 2009 and this year’s $314 million sale of SureWest Communicationsto Consolidated Holdings. RCN went privateat about 5.8 times cash flow, Grande recapitalized at about7 times cash flow and SureWest was valued at about 6.5times cash flow, experts said.

At those ranges, Knology could be valued between $1billion and $1.3 billion.

Miller Tabak media analyst David Joyce — who downgradedKnology to “neutral” from “buy” last week, afterthe stock surpassed his short-term $17 target — said itcould be valued at $19 to $20 per share, or about 7.1 timescash flow.

The company reported revenue of $519.6 million and netincome of $48.3 million ($1.29 per share) in 2011.

GROWING TWO WAYS

Knology is considered well-run and in 2010 laid out aplan to invest $100 million in extending its network to thefringes of service territories. The so-called Edge Out programhas paid dividends: Knology added about 29,000 totalvoice, video and high-speed data connections in 2011.

Knology has also been an aggressive buyer of systems.In 2007 it bought PrairieWave Communications with57,000 customers in South Dakota for $255 million andlater that year bought Dothan, Ala.-based Graceba TotalCommunications (25,000 subscribers) for $75 million. In2010, it bought Sunfl ower Broadband, with about 30,000customers in Kansas, for $165 million.